"Retirees Now Frequently Base Their Retirement Decisions on the Portfolio Success Rates Found in Research Such as the Trinity Study.... This Is Not the Information They Need for Making Their Withdrawal Rate Decisions."

"Big Moves Out of Stocks Should Not Be Done at All. But Strategic Asset Allocation Can Be Done At Very Rare Times, Maybe Six Times in an Investor’s Lifetime, Three Times When the Market Is Stupidly High and Three Times When Stupidly Low."

"There Is An Extensive Literature About the Predictability of Long-Term Stock Returns. There Is an Extensive Literature About Short-Term Market Timing. My Question Is About Long-Term Market Timing. The Literature Seems Slim."

"For Years, the Investment Industry Has Tried to Scare Clients Into Staying Fully Invested in the Stock Market at All Times, No Matter How High Stocks Go. It's Hooey. They're Leaving Out More Than Half the Story."

"There Are Time-Periods Where Stocks Are a Terrible Addition to That Portfolio. Yet Inexplicably, We As Planners STILL tend to Suggest That It Is 'Risky' to Not Own Stocks When in Reality the Only Risk Is to Our Business."

"There Is a Growing Behavioral Economics Movement, But It So Far Has Had Limited Impact. Economists Are Not Fond of the Softness and Imprecision of Psychology. These Notions Are Considered Vaguely Unprofessional and Flaky."

"I Was Hooked on the Idea of [Passive] Index Indexing, But Something Inside Made Me Wonder "Too Good to Be True?" and "What's the Downside?" I Happened on to Your Site and Valuation-Informed Indexing Seems to Make Sense."

"Rob's Da Man! Never in the History of the Diehards Forum Has One Poster, Always Making Civil and Well Thought-Out Posts, Managed to Irritate So Many Without Anyone Being Able to Articulate a Good Reason As to Why."

"Rob Bennett: Some People Disagree With Him, and He Rubs a Lot of People the Wrong Way. But He Has Interesting Ideas About Valuation-Informed Indexing, and He Delves Into a Lot of What Makes a Successful Investing Strategy."

"The Return Predictor Is Based upon the Principle that Over the Long Term, Stock Market Prices Will Reflect the Ten-Years Earnings Growth of the Underlying Companies. Prices Return to a Common Growth Pattern."

"You Go About It in a Manner that is Catastrophically Unproductive by Adding Missionary Zeal that Inflates Your Importance and Demeans Others. The Whole Idea That There is a New School of Safe Withdrawal Rates Reeks of Personal Aggrandizement."

“What Warren Buffett Did Was Essentially Quite Close to What Rob Bennett Has Written. Buffett Has in Fact Been Cleverly Incorporating Long-Term Market Timing Based on Valuation of the Market in His Allocation of Money to Stocks.”

"You've Got to Say One Thing for Rob. He Has NEVER Lowered Himself to Ad Hominen Attacks -- Subliminal or Otherwise -- on Any Other Person on This Board. Not Once. Ever. At Least Give Him Credit for That."

"Mr. Bennett, You Are Spot on About Integrating Some Type of Valuation Filter to One's Stock Allocation. Astute Investors Have Incorporated Some Type of 'Valuation Timing' Into Their Investment Decisions Since the Beginning of Time."

"There Is Nothing More Doubtful of Success Than a New System. The Initiator Has the Enmity of All Who Profit By Preservation of the Old Institution and Merely Lukewarm Defenders in Those Who Gain By the New One."

"Difficult Subjects Can Be Explained to the Most Slow-Witted Man If He Has Not Formed Any Idea of Them. But the Simplest Thing Cannot Be Made Clear to the Most Intelligent Man If He Believes He Knows Already What Is Laid Before Him."

"I Certainly Have Seen the Academic Profession Squelching Unfashionable ideas and Have Often Been on the Wrong Side of It. Kuhn Shows How Most Pathbreaking Scientific Ideas Are Rejected at First, Usually for Decades.”

"Rob Bennett Was an Early Pioneer in 3rd Generation Modeling by Advocating (Through Various Online Forums) that Withdrawal Rates Must Be Adjusted for Market Valuations Consistent with Research by Campbell and Shiller."

"Rob Is an Enigma in the Personal Finance World. He Has Interesting Theories on Investing Based on Market Valuations. But He Weaves a Tale Which Makes the Stories of Alexander Litvinenko & Gareth Williams Seem Tame by Comparison."

"I Have Read Everything I Can About Valuation-Informed Indexing. Buy-and-Hold Is Extremely Problematic. I Respect the Passion, Hard Work and Research That You Have Put Into This Very Important Issue. Your Work Has Huge Value."

"The Amount of Return You Can Expect From a Diversified Equity Portfolio Is Inversely Correlated to the Market Valuation at the Start of the Holding Period. It Is One of the Most Robust Statistical Relationships in Modern Finance."

"I've Had Similar Experiences. I Know of Two Young Professors Who Wanted to Do Research on Fundamental Index and Reported to Me That Their Colleagues Advised Them That This Line of Research Could Derail Their Career Prospects."

"As with Drug Studies Funded by Drug Companies, It Would Be Churlish to Suppose that the Chicago School of Business Was in the Bag. But It Would Also Be Idealistic to Assume That There Was No Funding Bias at All."

"This Sort of Intimidation Is Not Acceptable. The Cigarette and Pharmaceutical Industries Found Research Supporting Their Products By Funding It. But That Was Big Money Supporting Outcomes, Not Dissuading Others."

"The Situation [Referring to the Intimidation Tactics Used to Silence Academic Researcher Wade Pfau's Reporting of the Dangers of Buy-and-Hold Investing Strategies] Seems Well Below Any Professional and Academic Acceptable Standards."

"It Is Obvious that Rob, in Attempting to Identify New Safe Withdrawal Rate Strategies...Is Goring Your Ox. If Rob Improves on [the] Safe Withdrawal Rate Methodology, the Implication Is Clear: You Are All, Metaphorically, Out of Business."

"Naturally, I Am Finding That Valuation-Informed Indexing Can Allow You to Reach a Wealth Target With a Lower Saving Rate and to Use a Higher Withdrawal Rate in Retirement Than You Could With a Fixed Allocation."

"A Careful Examination of Past Returns Can Establish Some Probabilities About the Prospective Parameters of Return, Offering Intelligent Investors a Basis for Rational Expectations About Future Returns."

"How Can It Be That One-Year Returns Are So Apparantly Random and Yet Ten-Year Returns Are Mostly Forecastable? In Looking at One-Year Returns, One Sees a Lot of Noise. But Over Longer Time Intervals the Noise Effectively Averages Out and Is Less Important."

"The Notion That Rich Valuations Will Not Be Followed By Sub-Par Long-Term Returns Is a Speculative Idea That Runs Counter to All Historical Evidence. It Is an Iron Law of Finance That Valuations Drive Long-Term Returns."

"It's January and the Temperature Is Below Freezing. If You Asked Me Whether It Will be Warmer or Cooler Next Tuesday, I Would Be Unable to Say. However, If You Asked Me What Temperature to Expect on April 9, I Could Predict "Warmer Than Today" and Almost Surely Be Right."

"If the Response Is "Who Knew?", It Won't Be Much Comfort for Retirees in the Employment Line at Wal-Mart. This is Especially True Since a Rational Understanding of History and the Drivers of Longer-Term Stock Returns Can Help Retirees To Avoid That Surprise."

"New of the Demise of the Random Walk Has Only Very Slowly Spread, In Part Because Its Overthrow Came as a Shock. If the Random Walk Hypothesis Were Correct, the Most Likely Return Would Be the Historic Average Return. The Evidence, However, Is Strongly Against This."

"I Don't Care If You Do or Don't Believe That the Market Will Behave Similarly in the Future As It Has in the Past. Either Way, This [The Stock-Return Predictor] Is an Excellent Way to Understand What the Market Has Done In the Past."

"It Really Is a Shame and Indefensible That So Many Feel the Need to Jump Into It With No Interest of Posting on the Topic But Just to Disrupt. Are You That Insecure? Some on the Forum Have an Interest in This Topic. If You Don't, Stay Out!"

"Irrational Behavior Does Follow Patterns. But How Many Experts in Behavioral Finance Believe That Such Knowledge Can Be Used to Predict Markets? Basically, None. Your Model Cannot Attain the Level of Predictive Value You Claim."

"The Safe Withdrawal Rate Studies Are Based on History. This [The Retirement Risk Evaluator] Shows, Based on the Same History, What the Probabilities Are for the Future at Various Starting Points. If the First Has Value, Then Surely This Does Too."

"There Are Hundreds of People Who Contributed to This. This Calculator [The Stock-Return Predictor] Demonstrates in a Compelling Way the Power of This New Internet Discussion-Board Communications Medium."

"A P/E10 of'26' Is Bad. Now Look at the 30-Year Return Predicted by the Calculator -- 5.4 Percent Real. That's Not Bad. There Are All Sorts of Strategic Implications That Follow From Understanding That Stocks Provide Different Sorts of Returns Over Different Sorts of Time-Periods."

"I Would Never Invest in Anything Without Having Any Idea What the Expected Return Is. For Instance, I Would Not Walk Into a Bank And Say "I'll Take One Certificate of Deposit, Please" WIthout Asking What Rate They Are Offering."

"I've Seen Things Said on Investing Boards That I Have Never Heard Said in Discussions of Any Non-Investing Topic. The Question of Whether Valuations Affect Long-Term Returns Is a Topic That Causes People More Emotional Angst Than Does Abortion or Impeachment Proceedings or the War in Iraq."

"It's Not Possible For Those Who Have Come to Believe That Stocks Are Always Best to Accept that Valuations Matter. The Two Beliefs Are Mutually Exclusive. If Valuations Matter, There Is Obviously Some Valuation Level At Which Stocks Are Not Best. The Two Paradigms Cannot Be Reconciled."

"Dear Rob -- I Just Became Aware of Your Past Research in September. Since Then, I've Read Archives From Many Discussion Boards and Websites, and I Always Find Your Writing to Be Very Interesting and Intriguing."

"I Think Rob Bennett Did Provide An Important Contribution in Terms of Describing a Way for P/E10 to Guide Asset Allocation for Long-Term Conservative Investors. I Also Think He Was Right on the Issue of Safe Withdrawal Rates."

"Because the Precise Timing of This Mean Reversion Is Not Known in Advance, Expecting the Result to Happen in the Short-Term Will Not Be Possible. But Long-Term Investors Who Can Be Patient Can Wait for This Mean Reversion and Will Eventually Come Out Ahead."

"Your Work Is at Odds with the Ethos of the Board -- Here the Theme is John Bogle's Philosophy, Which Eschews Market Timing. This Board Came Into Existence to ESCAPE One Individual, the Very Individual With Whom You Have Openly Aligned Yourself."

"Why Is It Such an Odious Violation of the Tenets of Bogleheadism to Explore Whether Someone Who Has Enough Patience Might Be Able to Benefit from the Transitory Nature of Speculative Returns (the Idea That the P/E Ratio Eventually Ends Up Where It Started)?"

"Let Me Explain Why I Posted About This Here. Valuation-Informed Indexing Has Had Critics for Years. But Until Norbert Did It In 2008, Nobody Seemed to Have Provided a Serious Investigation of It. I Couldn't Understand Why. That Bothered Me."

"If You Really Don't Like Market Timing in Any and All Forms, You May Not See Any Point in an Empirical Investigation. You View Me as One of a Long Line of Hucksters Trying to Sell You Some Snake Oil. I Don't Want to Be Such a Person."

"Having a Completely Ineleastic Demand for Equities Is a Bit Bonkers. No One Acts That Way with Life's Other Important Commodities. Campbell Advocates a Linear Valuations-Based Strategy so That You Wouldn't Be Making Big Changes. This Would Be Like Rebalancing But More Flexible."

"The Whole Idea of Valuation-Informed Indexing Belongs to You. Do You Mind if I call the Paper 'Valuation-Informed Indexing'? I Would Give You Credit. I Have Been Toying With the Idea of Sending the Paper to the Journal of Finance, Which Is the Most Prestigious Journal in Academic Finance."

"I Definitely Need to Cite You as the Founder of Valuation-Informed Indexing, As I Have Not Found Anyone Else Who Can Lay Claim to That. Shiller Pointed Out the Predictive Power of P/E10 But Never Discussed How to Incorporate It Into Asset Allocation, As Far As I Know."

"I Tested a Wide Variety of Assumptions About Asset Allocation, Valuation-Based Decision Rules, Whether the Period Is 10, 20, 30 or 40 Years, and Lump-Sum vs. Dollar-Cost Averaging To Show That the Results Are Quite Robust to Changes In Any of These Assumptions."

"I Wrote Up the Programs to Test Your Valuation-Informed Indexing Strategies Against Buy-and-Hold and I Am Quite Excited. You Say in the RobCast That VII Should Beat Buy-and-Hold About 90 Percent of the Time. I Am Getting Results That Support This."

"Never Underestimate the Power of a Dominant Academic Idea to Choke Off Competing Ideas, and Never Underestimate the Unwillingness of Academics to Change Their Views in the Face of Evidence. They Have Decades of Their Research and Academic Standing to Defend."

"Since They Did Not Diagnose the Disease, There Is Little Popular Confidence That They Know the Cure. What If Economics Is, Actually, At the Same Level as Medicine Was When Doctors Still Believed in the Application of Leeches?"

"I Love the Humans Dearly (the Title of the Book I Am Writing Is Investing for Humans: How to Get What Works on Paper to Work in Real Life) But They Can Be a Trial at Times. Hey! Helping the Humans Learn What It Takes to Invest Effectively Is Not All That Different From Being Married!

"Wow, I Did Not Realize You Had Achieved This Much Success and Had Many Devoted Believers/Followers. That’s Great, Then Ignore the Opposition. It Is Great to Have Opposition: That Means You Are Doing Something Right."

"I Do NOT Believe I Know It All. I Believe That Shiller Discovered Something Very Important and It Appalls Me That More People Are Not Exploring the Implications of His Findings. My Aim Is To Launch a National Debate."

"I LOVE Everything About Buy-and-Hold Other Than the Failure to Encourage Investors to Take Price Into Consideration When Setting Their Stock Allocations. That's a Mistake That Was Made Because Shiller’s Research Was Not Available at the Time The Strategy Was Being Developed."

"Valuation-Informed Indexing Sounds Like a Real Thing. If It Is and I Can Thoroughly Understand It, Then It Will End Up In My Classrooms and in My Students' Minds (Of Course, With References to You and Wade)."

"As a Fan of Thomas Kuhn's The Structure of Scientific Revolutions, I Know That Progress Can Be Frustratingly Slow and What Is Typically Needed Is Either a Crisis or the Ascent of a New Generation of Scientists Who Did Not Build Their Careers on the Old Models and Theories."

"Rob Gets Himself So Worked Up Over What Someone Else Is Doing With Their Own Money and Not Bothering Rob in the Least. As Long As They Aren't Knocking on Your Basement Door, What Do You Care? They Are Happy and Content. Leave Well Enough Alone and Focus on Your Own Account."

"I've Been on Forum Since the BBS Days and I Think Rob is Special. He Could Be an Internet Meme If He Put Some Effort Into It. Someday, He Will Realize That the Only Thing He's Good At Is Being an Epic Loser. He Just Needs to Embrace That Idea and Run With It. Watch Out, LOLCats, Here Comes Pathetic Guy!"

"You Guys [the Greaney Goons] Are the Same Jokers Who Have Done This Before, Sparring with Rob Over Nonsensical Issues On This Site and Others, Leveling Personal Attacks, and You Don't Even Use Real Names! Rob Is Entitled to His Opinion, But the Fact That You Challenge Every Jot and Tittle of What He Says Makes It Clear You Have An Unholy Agenda. Please Take It Elsehwere."

"Rob, Take This As Friendly Advice. You're a Smart and Articulate Guy and You Could Be Making Valuable Contributions to This Discussion. I've Dealt with the Mentally Ill Before and I've Found That They Sometimes Can Be Reasonable If Gently Redirected."

"I’m a Numbers Guy. And I Believe I Understand Rob’s Thesis, that Future Returns, Over the Next Decade, Have a Tight Inverse Correlation to the PE10 for the Starting Point. Remember, Correlation Doesn’t Need to be 100%, Only That There’s a Bell Curve of Potential Outcomes that Shift Meaningfully Based on the Input."

"I Have had Academic Researchers Tell Me That They Dream of the Day When They Will be Able to do Honest Research Once Again. I Have had Investment Advisors Tell me That They Dream of the Day When They Will be Able to Give Honest Investing Advice Again."

"Let’s Call a Spade a Spade, Shall We? Wade Pfau Stole Your Research and Put His Name on it, Throwing You Just a Tiny Crumb of Acknowledgement to Ward Off a Lawsuit. He’s Profiting Handsomely By His Theft, Leading a Charmed Life, Widely Published, Widely Respected. While Rob Bennett Continues to Toil in Total Obscurity. It’s So Incredibly Unfair, I Think If It Happened to Me, It Could Actually Drive Me Insane."

Why Buy and Hold Investing Can Never Work

Stock valuations matter. Stocks obviously offer a stronger value proposition at fair or low prices than they do at insanely high prices. But the Buy-and-Hold concept calls for investors to ignore valuations when setting their stock allocations. The purpose of a market is to set prices properly. If a large number of investors becomes determined to ignore value propositions, the market is not able to perform this function except by bringing on price crashes and the economic crises that follow from them.

The history of the strategy can be traced back to the mid-1500s, when the idea of an “efficient” market first surfaced. University of Chicago Finance Professor Eugene Fama and others did extensive research supporting the model in the 1960s. Burton Malkiel then popularized the idea in his bestselling investing guide A Random Walk Down Wall Street, published in 1973. The runaway U.S. bull market of the 1980s and 1990s confirmed the merit of Buy-and-Hold in the minds of millions of middle-class investors.

B) The Economic Crisis Raises Doubts

It was the stock crash and economic panic of late 2008, however, that ignited the fire that has led to more widespread and more sustained criticism of the long-dominant model for understanding how stock investing works. Justin Fox published The Myth of the Rational Market in June 2009. Rob Arnott declared in that year that the conventional investing wisdom of today is largely the product of “myth and urban legend.” Famed Value Investor Warren Buffett dismissed much of the thinking on which 90 percent of today’s “experts” base their strategic recommendations as “nutty.” And Peter Bernstein observed that, given the mountain of evidence that has accumulated over time that Buy-and-Hold simply does not stand up to scrutiny: “Everything has collapsed.”

In one sense, that is indeed so. There is no logical case that can be made in defense of the Buy-and-Hold concept today. Even its most adamant adherents have given up defending the model, as is evidenced by the Ban on Honest Posting that has been imposed at numerous investment discussion boards and blogs. There is another sense, however, in which Buy-and-Hold remains dominant. Investing experts have been highly reluctant to acknowledge the mistakes they have made in recent decades in clear and frank and plain and understandable terms. The result is that most middle-class investors continue to believe that Buy-and–Hold makes sense or even that it is the most prudent strategy available to them. Indeed, Fox argues that, while the Efficient Market Theory (the intellectual framework supporting Buy-and-Hold) has been discredited, the idea of sticking to the same stock allocation at all times remains a realistic strategy.

C) How Buy-and-Hold Became Popular

The key to making sense of this confused state of affairs is understanding where the Buy-and-Hold idea came from and why it once seemed to hold so much promise.

Throughout most of the history of investing knowledge, strategic analysis has been subjective and focused on short-term results. Those who favored stocks have been referred to as “bulls” and those who dissented have been referred to as “bears.” Both bulls and bears have of course always offered rationales for their beliefs. But until the 1970s it could not be said that the general public’s understanding of how to invest was scientific. That changed with the development of the Buy-and-Hold model. This model was rooted in academic research. Thus, its insights were not the product of subjective impressions — they were the product of objective testings of the historical stock-return data. Moreover, the then-new Buy-and-Hold model achieved a breakthrough in its focus on what works in stock investing not for a year or two or three but in the long term. Buy-and-Hold was in a number of important respects something new.

This was one key to the popularity it achieved in recent decades. The U.S. middle-class was at this time acquiring sufficient wealth to permit it to invest in stocks and employers were shifting the responsibility for the funding of their retirements to the workers, giving middle-class workers little choice but to learn something about equities. Most middle-class workers have long had a fear of investing in stocks because of the big losses associated with this asset class at times of stock crashes. The promise of a scientific, long-term approach held great appeal. Few middle-class workers studied Buy-and-Hold to the extent needed to understand where the ideas came from or why they were supposed to work. But most quickly grasped the essential point being promoted — this was responsible investing. Buy-and-Hold became popular because it was viewed as being a rejection of the Get Rich Quick thinking that had given much investment commentary a bad name.

A second reason why Buy-and-Hold won the confidence of millions is that its fundamental tenet is that markets work. Buy-and-Hold is Adam Smith Economics applied to the world of investing. Most middle-class workers feel no need to beat the market. Their aim is merely to earn their share of the rewards generated by the market. The slogans popularized by the Buy-and-Hold advocates — “It’s Not Timing the Market But Time In the Market That Matters,” “There’s No Such Thing As a Free Lunch,” “Stay the Course,” “Stock for the Long Run” — speak to an proudly practical and properly skeptical and generally optimistic people. The Buy-and-Hold marketing slogans hit emotional hot buttons (and for entirely good and encouraging reasons).

Finally, Buy-and-Hold became popular because of the low stock valuations that applied in the days when the middle-class was first learning about it via A Random Walk Down Wall Street and the marketing efforts of Bogle’s Vanguard Group. Stocks were selling at rock-bottom prices in the late 1970s and early 1980s. When stocks are selling at low prices, the most likely 10-year annualized return is 15 percent real. Buy-and-Hold did not cause the amazing returns experienced by stock investors from 1975 through 1995. But our knowledge of the effect of valuations on long-term returns was far less developed in those days and so Buy-and-Hold was often given credit for those returns. Stocks would have done well regardless of whether Buy-and-Hold had been developed or not, but, since Buy-and-Hold was the new thing and appeared to be an entirely plausible and prudent model for understanding how stock investing works, Buy-and-Hold got the credit in the minds of millions of middle-class investors.

D) The Greatest Mistake in the History of Personal Finance

It’s easy today to explain why Buy-and-Hold can never work. The root idea is preposterous (but not obviously so to those who have not yet seen through it — there are many smart and good people who possess a strong confidence in the concept). For Buy-and-Hold to work, valuations would have to have zero effect on long-term returns. Stocks would have to be the only asset class on the face of Planet Earth of which it could be said that the price paid for the asset has no effect on the value proposition provided. This cannot be. Price must matter. And if price matters, investors should not be going with the same stock allocation at times when valuations are insanely high as they do when stocks are fairly priced or low priced. Buy-and-Hold defies common sense.

Why, then, did so many experts come to believe?

The academics responsible for the Buy-and-Hold concept discovered something of critical importance in their studies of the historical data. They learned that short-term timing does not work. That is, those who predict where stock prices will be in a year or two are no more successful than what would be expected if their predictions were random rather than informed by intelligent study of the market. This was breakthrough stuff. This changed the history of stock investing. No longer was stock investing about bulls and bears making guesses as to when to buy or sell stocks. The science of investing showed that short-term forecasting does not work and that a long-term focus is needed. The science appeared at the time to suggest that a Buy-and-Hold strategy (sticking to the same stock allocation at all times) makes sense.

The science did not prove that Buy-and-Hold works. The Greatest Mistake in the History of Personal Finance took place when the academics jumped to the hasty conclusion that the fact that short-term timing does not work necessarily leads to a conclusion that Buy-and-Hold is the only rational strategy.

There is not one possible explanation for why short-term timing does not work. There are two. The explanation adopted by Fama and the other academics was that short-term timing does not work because the market always set prices properly and it is therefore impossible for even the smartest individual investor to do a better job than the market at determining the proper price for stocks. There is an alternate explanation that offers every bit as satisfactory an explanation. It could be that the market does such a poor job of setting prices that there is no way for even the smartest investor to make sense of what the market is going to do. It could be that the reason why short-term timing does not work is not that the market is efficient but because it is wildly inefficient. It could be that stock prices do not reflect a rational collective assessment of the true value of stocks but an almost entirely emotional assessment that signifies just about nothing meaningful about the proper price of the stock market. Irrational markets cannot be timed because irrationality cannot be predicted.

There is a way to test which of the two explanations is the right one. If the market is efficient, the concept of overvaluation is silliness. An efficient market is a market that sets prices properly. But Shiller’s 1981 research (confirmed by a mountain of research done since then) shows that overvaluation is a meaningful concept. Shiller showed that stocks offer better long-term returns starting from times of fair or low prices than they do starting from times of insanely high prices. Even many Buy-and-Hold advocates acknowledge today that valuations matter. William Bernstein says that valuations affect long-term returns as a matter of “mathematical certitude.”

The further reality is that the market must in an ultimate sense be efficient. The purpose of a market is to set prices properly. If investor emotions were the sole influence on market prices, stock prices would go to the moon and stay there; what could ever persuade investors not to vote themselves raises by pushing stock prices higher and higher and higher yet? The market must ultimately be efficient, as the academics responsible for the Buy-and-Hold concept claimed. Yet the academic research of the past three decades shows conclusively that the market is not immediately efficient. What, then, is the full reality?

The full reality appears to be that the market is gradually efficient, not immediately efficient. It is investor emotions that determine market prices in the short term. But it is economic realities that determine stock prices in the long term (after the completion of 10 years of market gyrations or so). If the stock price rises too much higher than the price justified by the economic realities, opportunities open up for competing businesses to obtain the same assets on the cheap (relative to the market price assigned to them) and thereby to create a new business with the same profit potential as the overvalued one and thereby to pull the value assigned to it by the stock market down to reasonable levels. The market does indeed insure that stocks are priced properly. But it does not do this in an instant. The process can drag out for 10 years or even a bit longer.

E) Long-Term Market Timing Is Required

The strategic implications are earth-shaking. It turns out that we have been telling millions of middle-class investors precisely the opposite of what really works in stock investing. Since the market sets the price improperly in the short term and properly in the long term, successful long-term investing requires market timing (not the discredited approach of short-term timing, but long-term timing, which the historical data shows has always worked). The key to long-term success is to disdain the idea of sticking with the same stock allocation but instead always to be certain to adjust one’s stock allocation as required by changes in the valuations assigned to the broad market indexes (only one allocation change every 10 years is required on average but it is essential that long-term investors make this change — Buy-and-Hold never works in the long run because it argues that this change is not necessary or even that it is a good idea not to make the allocation change).

Consider the investor debating whether to buy the S&P Index or Treasury Inflation-Protected Securities (TIPS) in January 2000. TIPS were paying a 10-year return of 4 percent real. The most likely annualized 10-year return on the S&P Index (according to a regression analysis of the historical data showing the effect of valuations on long-term returns) was a negative 1 percent real. That’s a difference of 5 percentage points of return for 10 years running. The investor with a portfolio of $100,000 was likely to lose 50 percent of that amount ($50,000) over the course of the next 10 years by following the advice of the Buy-and-Hold advocates to invest in stocks rather than TIPS “for the long run.” An investor with a portfolio of $500,000 was likely to pay a price of $250,000 for following the “expert” guidance. An investor with a portfolio of $1,000,000 was likely to be $500,000 less wealthy at the end of a decade as a result of his decision to place his confidence in the “scientific” approach to stock investing.

Tens of thousands of investing experts recommended Buy-and-Hold investing during the years of insane stock prices (January 1996 through September 2008). Millions of middle-class investors lost sums of $50,000 or $250,000 or $500,000 as a result. The combined effect is that we are in the process of seeing millions of failed retirements, millions of failed businesses and millions of failed marriages play out before our eyes. Buy-and-Hold has caused the greatest economic crisis since the Great Depression and we are still in the early years of our attempt to overcome this tsunami of financial mismanagement. Our political system is feeling the strain. Our misguided and arrogant advocacy of Buy-and-Hold has left millions of middle-class workers in a frightened and confused state and anger at the economic and political leaders on whose watch this epic disaster took place is steadily growing.

F) Rational Investing Is the Answer

We’ve got a huge mess on our hands. Fortunately, an inviting solution to the problem readily presents itself. Buy-and-Hold is rooted in a huge mistake. We have been urging people to invest their money pursuant to that mistake for many years now. What if we stopped?

If we stopped, we would be removing a ball and chain from the leg of the U.S. economy. We would be setting the U.S. economy free to achieve things it has never achieved before. We would no longer be misallocating resources to the tune of trillions of dollars. We would be freeing the market to allocate resources where they can do the most good, freeing middle-class workers to achieve financial freedom years sooner than was possible during the Buy-and-Hold Era, possibly freeing our economy of the threat of economic crisis for many decades to come (each of the four economic crises we have seen since 1900 was preceded by a time in which the Buy-and-Hold Idea [that stock prices do not matter] became insanely popular, popular enough to send stock prices to double their fair value [prices went to three times fair value in the late 1990s]). The Golden Age of Middle-Class Investing is awaiting us, if we are able to win the help of the few brave and civic-minded people of influence needed to usher it in.

G) A Wall of Resistance

There is one step required before the transition from the Buy-and-Hold Era to the Rational Investing Era (The Rational Investing Model is the alternative to the Buy-and-Hold Investing Model — it is described in some depth in articles and podcasts available at the www.PassionSaving.com site) can begin in earnest. We need to persuade the many experts who advocated Buy-and-Hold to acknowledge the mistake and to thereby launch a national debate on what really works in stock investing. As of today, an institutional interest in preserving the status quo and avoiding the need to acknowledge mistakes has worsened the economic crisis and threatened to bring on a Second Great Depression.

I put a post to a Motley Fool discussion board on May 13, 2002, noting that valuations affect long-term returns and that the studies that financial planners use to help us plan our retirements (which in deference to the Buy-and-Hold Model include no valuation adjustments) therefore get the numbers wildly wrong. Several big names in the field have confirmed my findings. For example, William Bernstein said that any aspiring retiree giving thought to making use of the conventional retirement studies to plan a retirement would be well-advised to “FuhGedaBouDit!” Swedroe said in a post to the Bogleheads.org board community that the conventional retirement studies (the Old School Safe-Withdrawal-Rate Studies) constitute “Garbage-In/Garbage-Out” research. I have led an effort on the internet for nearly eight years now to get these studies corrected and to bring to the attention of middle-class investors the flaws in the Buy-and-Hold Model responsible for the demonstrably false retirement claims which are likely to cause millions of failed retirements in days to come.

These efforts have been unsuccessful because of a wall of resistance put up by The Stock-Selling Industry to the idea of sharing with middle-class investors why Buy-and-Hold has failed and what the academic research of today says is most likely to work for the long-term investor. Two comments by Burns sum up the resistance that has been offered by many. In a June 2005 column, Burns explained why the media has failed to inform investors of what they need to know to protect themselves from the dangers of following a Buy-and-Hold strategy: “It’s information that most people don’t want to hear,” Burns explained. Investing experts see it as their job not to tell us what we need to hear about stocks but what we want to hear about stocks at times when we are insanely overinvested in them because of their earlier bad advice. In e-mail correspondence with me, Burns offered the view that my efforts to help middle-class investors learn the realities would prove to be “catastrophically unproductive,” presumably because they were at odds with the interests of The Stock-Selling Industry to keep the research findings of the past 30 years bottled up.

Bans on honest posting on the matters discussed in this Knol have been adopted at the discussion boards hosted at www.Morningtar.com, at www.IndexUniverse.com, at www.Bogleheads.com, at www.Fool.com and at a number of personal finance blogs (the Oblivious Investor blog, the Behavior Gap blog, and others). Numerous other blog owners (the owners of the Get Rich Slowly blog and the Frugal Dad blog, among others) have elected not to report on these matters after learning about them (while not banning honest posting in the comments sections of their blogs).

We are at an impasse. We know that Buy-and-Hold does not work. Even its most ardent advocates are so lacking in confidence in this model today that they insist on bans on discussion of its flaws at discussion boards or blogs at which they participate. But The Stock-Selling Industry feels strongly that it is not in its best interest to let the cat out of the bag. And most middle-class investors so lack confidence in their own ability to understand the realities of stock investing that they have placed their confidence in the very experts working hard to deny them access to what they need to know! One poster on the Vanguard Diehards board told me that all that I said about investing made sense to her but added that she did not have time to partake in a personal quest to discover “the Hold Grail of Investing” and thus felt compelled to invest her money according to what the many experts advocating Buy-and-Hold were telling her. Her number is in the millions.

H) A National Debate Is Needed

We need a national debate on what works in stock investing. Buy-and-Hold advocates should of course be part of that debate. Buy-and-Hold advocates are smart and good people and have developed many rich insights despite the mistake they made about the core Buy-and-Hold claim (that changing one’s stock allocation in response to big price changes is not necessary for long-term investing success). But we need a debate in which Buy-and-Hold advocates drop the pose of perfect understanding that has kept us from exploring new insights for so many years now. We need to see an openness to new investing ideas if our economic and political systems are to survive today’s crisis. We need to rebuild optimism for the future by partaking in a fresh start in our effort to discover how stock investing works, We need to put aside those of the old rules that no longer work and replace them with better-informed new rules that do.

I believe that it is going to take a populist uprising to get us there. My experience of the past eight years tells me that The Stock-Selling Industry is dead-set opposed to the idea of permitting middle-class investors to learn about the failure of the Buy-and-Hold Model. It is an industry’s dream to have millions of customers who have come to believe that there is no price at which its product does not offer a compelling value proposition. And this field is a field in which a perception of expertise is critical for success; acknowledging mistakes is viewed by most in this field as a career-limiting move. Most of today’s investing experts possess more expertise in salesmanship and in politics and in the construction of pointless word games than they do in how to invest effectively for the long run. Many have lost sight of the point of investing analysis — to help middle-class people finance their retirements. All this needs to change if our way of life is to survive the inevitable collapse of the Buy-and-Hold Model.

Our hope lies in coming to see the move from the Buy-and-Hold Investing Model to the Rational Investing Model (the Rational Model says that investors must consider price when setting their stock allocations) not as an investing question or an economics question but as a political question. We have a long tradition in this country of free speech. Free speech is permitted in our discussions of baseball and novels and nutrition and fashions. It should be permitted in discussions of the flaws of the Buy-and-Hold Model as well.

Once the internet is opened to honest posting on important investment topics, the Buy-and-Hold Era can quickly be brought to an end. There is obviously no one who obtains a benefit by investing ineffectively. So, if investors are permitted to learn about the realities as revealed by the academic research of the past three decades, the percentage of investors who understand that valuations affect long-term returns will gradually increase to the point at which Buy-and-Hold will no longer maintain enough support to be able to do further damage to the U.S. economy. I believe that all who have received benefits under the U.S. economic and political systems should be working hard to bring about that day as quickly as possible.

Buy-and-Hold can never work. But many of the insights developed by the smart and good people who brought us the Buy-and-Hold Model can do wonderful things to help millions when incorporated into a model that does work — the Rational Investing Model, a model that encourages investors to take valuations into consideration when setting their stock allocations.

Discussions started at the Hot Air and Free Republic sites, two conservative discussion-board communities, did not take off. There seemed to be skepticism in these communities about my intent in raising questions about Buy-and-Hold, although the grounds for the skepticism were not spelled out.

Steve Pavlina deleted a thread that generated some good discussion at his Personal Development for Smart People Forums. There was no abusiveness on the thread at all, just some good questions. I sent Pavlina an e-mail asking for an explanation for why the thread was deleted, but he did not respond.

I’ve been sending numerous e-mails about the flaws in the Buy-and-Hold model to journalists, bloggers, and investing experts and expect to send many more over the course of 2010. If you would like to read the full text of the e-mail sent to any particular person, please go to my blog (A Rich Life) and enter the name of the person into the search box; that will pull up the blog entry setting forth the text of that e-mail. E-mails have been sent to: (1) Vanguard Funds Group Founder John Bogle; (2) Keith Hennessey, Member of the Financial Crisis Inquiry Commission; (3) Yale Professor and Irrational Exuberance Author Robert Shiller; (4) Jonathan Curiel, Author of the True Slant Blog; (5) John Hayword, Author of the Doctor Zero Blog; (6) William Jacobson, Author of the Legal Insurrection Blog; (7) the HillBuzz.com Web Site; (8) Cassy FIano, Author of the Cassy Fiano Blog; (9) Jane Hamsher, Owner of the FireDogLake.com Site; (10) Washington Post Columnist E.J. Dionne; (11) New York Times Columnist Paul Krugman; (12) Patrick Courrielche, Journalist at www.BigHollywood.Breitbart.com; (13) Jason Zweig, Author of the Intelligent Investor Column in the Wall Street Journal; (14) Justin Fox, Author of The Myth of the Rational Market; (15) Bill Schultheis, Author of The New Coffeehouse Portfolio; (16) Dallas Morning News Columnist Scott Burns; (17) Former Wall Street Journal Columnist Jonathan Clements; (18) Money Magazine Editor Pat Regnier; (19) Maryland Financial Planner Michael Kitces; and (20) Jim Wiandt, Publisher of the www.IndexUniverse.com site.

Three recent blog entries explore the questions examined in this Google Knol:

Forbes published an article entitled How to Profit from an Inefficient Market. It states that: “We humans are so consistently illogical that our illogic itself is very predictable. For attentive investors, that’s good news. By studying other investors’ recurring patterns of irrational behavior, it is possible to build an investment strategy that profits from the inherent lack of efficiency in markets that are driven by humans.” Have you noticed that it’s always those darn humans that muck up all the wonderful theories of the investing “experts”? We need to figure out a way to create a market that would not require the participation of the darn humans. Then Buy-and-Hold would be aces! Oh, my!

The Pop Economics blog offers “Rob Bait” in a post entitled “Resistance Is Futile: Why Buy-and-Hold Beats Value Investing.” I don’t entirely agree with all of the arguments advanced, but I feel that I can say that my friend Pop has put forward one of the best reasoned and most emotionally balanced cases for the Buy-and-Hold strategy that I have come across. Good job, Pop!

I get the feeling that the stars are shifting in the skies (slowly but surely). I received a warm welcome at the www.BearForum.com board when I introduced the community there to the ideas set forth in this Google Knol.
(There is a charge to view this discussion board.)

Rajiv Sethi, a Professor of Economics at Barnard College, Columbia University, says: “Rob Bennett makes the claim that market timing based on aggregate P/E ratios can be a far more effective strategy than passive investing over long horizons (ten years or more.) I am not in a position to evaluate this claim empirically but it is consistent with Shiller’s analysis and I can see how it could be true.”

Schroeder (a regular at the Goon Central board) put a (perfectly reasonable) post to Rajiv Sethi’s blog and I responded by pointing to a calculator at my web site (“The Investor’s Scenario Surfer”) that shows that Valuation-Informed Indexing is always superior on a risk-adjusted basis to Buy-and-Hold over 30-year time-periods. Rajiv raised some reasonable skepticism about how the calculator is set up. He said: “Rob, I don’t think that randomly generated returns (regardless of the distribution you are using) can provide a convincing test of your claim. What you would need to do is to use historical data (as Schroeder has done) with multiple starting points and horizons. But even this is not enough: the P/E thresholds you choose for switching portfolio composition must be such as to generate on average over time the same asset allocation as the buy and hold strategy. In other words, you can’t pick the critical P/E thresholds (12/20) and the asset allocations (25/50/75) independently: they have to be selected jointly to match the buy and hold asset allocation over long horizons.” My response (too lengthy to post here) is at Rajiv’s blog.

Rajiv Sethi posted an update to his blog post (see above) linking to the Pop Economics blog post (see above) and saying: “For a sober assessment of why passive investing remains the best strategy for most investors despite modest violations of informational efficiency, see this post at Pop Economics.” I posted a comment praising the Pop Economics post for offering a non-dogmatic defense of the Buy-and-Hold Model and offering to write a Guest Blog Entry responding to the points made in it either at the Pop Economics blog or at the Rajiv Sethi blog. I then sent an e-mail to Pop telling him that I was grateful for his efforts to take things in a more constructive and productive and life-affirming direction and asking him to let me know if he has an interest in hosting a Guest Blog Entry.

March 2010

Andrew Smithers has written a fantastic summary of the points explored in this Google Knol entitled The Efficient Market Theory Must Be Discarded.Juicy Excerpt: “When tested, however, the EMH failed, as real equity returns do not follow a “random walk with drift” but exhibit negative serial correlation. This meant that sustained periods of real returns, which were above the very long-term average, were followed by below average returns and vice versa. This evidence obviously meant that the EMH, as applied to the stock market in aggregate, must be discarded or modified. Attempts at modification have failed. No one has yet produced a version of the EMH which can be tested and fits the evidence. Thus, the EMH must logically be discarded, as a valid hypothesis must be testable. The simplest explanation of the observed behaviour of returns is that equity markets are moderately or imperfectly rather than perfectly efficient, and rotate around fair value…. It is therefore possible, contrary to the EMH, to know whether markets are overvalued. It is not, however, possible to know when they will crash as, if this could be done, arbitrage would ensure that markets never became misvalued…. It is not correct to claim that no one forecast the financial crisis, as I and others did so. What we did not and could not do is forecast its timing.” That’s the good stuff.

On March 10, the owner of the Monevator blog imposed a ban on honest posting on the flaws of the Buy-and-Hold Model. He said: ” Rob Bennett – I have deleted your comment and my patience has finally run out on allowing you to post your opinions about conspiracy in the markets on my blog. Your comments are misleading and dangerous, and I don’t spend 3-4 hours writing articles to have you append your mantra at the end of every post. There is no conspiracy about valuation in the stock market. This very article mentions valuation…. Everyone knows about valuation. It is discussed non-stop…. He [referring to Benjamin Graham] wrote about valuation in 1935. Yes, this ‘conspiracy’ you see didn’t even exist in 1935. Enough is enough.” I posted a comment saying: “And yet there are many who advocate Buy-and-Hold Investing (failing to adjust your stock allocation in response to big price swings) to this day, Monevator. Why? For what purpose?” The comment was deleted within a few minutes of the time at which it was posted.

We had a friendly and illuminating discussion of the ideas raised in this Google Knol at the Budgets Are Sexy blog, at which I posted a Guest Blog Entry entitled When Stock Prices Crash, Where Does the Money Go? I think that the reason why the discussion went so well is that this particular blog appeals to young readers and so we did not have any Know-It-All Buy-and-Hold Dogmatics in attendance. Discussions of investing are so much more pleasant without the defensiveness that comes into play when a significant number are so concerned with insuring that they never have to admit having gotten something wrong that they see new ideas as a threat.

April 2010

The owner of the Monevator blog posted a comment (Comment #35) to a thread at the Budgets Are Sexy blog explaining his decision to ban posting on the flaws of the Buy-and-Hold Model at his site. He assured me that “I have no ill-feelings” and proved the point by reporting that “if you look at my Twitter stream just the other day I suggested someone read your blog for more on valuation informed strategies” (I of course thanked Monevator for the kindness). His explanation is that: “Since I stopped allowing your comments, my blood pressure has subsided and I even had some readers thank me. Nobody has asked for them back.” This is by no means an atypical reaction to my writings on the flaws of the Buy-and-Hold Model. I have seen similar reactions from tens of thousands of Buy-and-Holders and even from a good number of big names in the field. I argued in my response that we need to explore why it is that challenges to the validity of the Buy-and-Hold Model prompt such emotional reactions on the part of those promoting or following this model.

May 2010

Pop Economics posted my long-awaited response to his “Rob Bait” article defending Buy-and-Hold (please see the February updates for background). His introduction to my Guest Blog Entry contained an extremely helpful statement: “Many of Rob’s arguments in favor of value investing actually make a lot of sense—in a way that should make any rational buy-and-holder uncomfortable…. Trust me, it’s worth questioning your assumptions every once in a while.” That’s precisely what needs to be heard from those arguing the pro-Buy-and-Hold position (Pop is making a reasonable case for Buy-and-Hold, he is not endorsing Valuation-Informed Indexing). The blog entry also contains an exclusive Pop-designed psychedelic head shot of me, news which will come as a relief to the thouands who have for too long now been frustrated in their efforts to get their hands on such a thing. The only downer here is that Pop let the Lindauer/Greaney Goons run wild in the Comments section of the blog and they intimidated him into shutting down the thread. Stop letting the 10 percent Goons determine what the 90 percent Normals get to talk about, Blog Owners of America!

Edwin Ivansaukas, the blogger who owns the Finantage blog, learned about our wee little “controversy” by reading the Pop Economics Guest Blog Entry and promised to explore the topic at his own blog. Edwin told me in an e-mail that he is planning a series of articles looking at various aspects of the question. He expressed grave doubts about the claim I make in my Google Knol entitled “The Bull Market Caused the Economic Crisis.” I told Edwin that I think he is proceeding in precisely the right way. We need to make Buy-and-Hold critics feel safe about expressing their sincere views. But we also need to encourage those who believe in the Buy-and-Hold strategy to take on their critics in constructive ways. It is when all community members are putting forward their sincere beliefs that we all enjoy a rich learning experience together. I much look forward to seeing what Edwin comes up with.

Brett Steenbarger, author of The Psyhology of Trading, said that I offer an “interesting view” in my Google Knol entitled The Bull Market Caused the Economic Crisis (please see link just above). I am proud of the work I did on that Knol. I think of it as my Blood on the Tracks.

The Death by 1,000 Papercuts Site has begun running a weekly column in which I explore Investing: The New Rules. They made me promise to only say laudatory things about the “experts” who advocate Buy-and-Hold. Just kidding!

Doug Brady writes at the Conservatives for Palin site that: “Rob Bennett, who usually writes about investment strategies, has a piece today in which he predicts that a return to living within our means and personal responsibility, as emphasized by Governor Palin, is what will ultimately put the U.S. economy back on track.” Josh Painter, at the Texas for Sarah Palin site, expresses skepticism re my prediction that Palin may bring the economic crisis to an end by letting middle-class investors know about the Big Fail of Buy-and-Hold and the need for us all to move to more realistic investment strategies. He says: Despite Bennett’s astonishing prediction, Gov. Palin has never claimed to be able to single-handedly solve the nation’s economic problems. While her common sense recommendations for turning the nation’s economy around are prudent, Bennett’s prediction is less so. If he wants to climb onto a limb and saw it off, as DBKP’s editors suggest, it’s not fair to the governor for him to drag her out there with him.”

July 2010

The Financial Uproar blog posted an article (“Rob Bennett: Crazy? Or Crazy Like a Fox?) seeking to make sense of the smear campaigns that have been directed at me as punishment for my “crime” of being the first person to report accurate (that is, valuation-adjusted) safe withdrawal rates. Uproar stated: “I’ve always liked what Rob had to say. He has well thought-out opinions about everything he writes. He’s clearly a very intelligent guy. So I decided to click through to his blog (“A Rich Life”) to see what he writes about. Turns out that Rob is just a little crazy.” Uproar invited me to write a Guest Blog Entry about the New School safe withdrawal rate research and I wrote an article entitled “It’s Impossible to Plan a Retirement Without Looking at Valuations.” Uproar described it in a preface as “another guest post by everybody’s crazy personal finance guy Rob Bennett.” He commented that: “I really like this post. It’s short and to the point. It does a good job of giving us all a decent primer to what the heck he’s talking about.” The Wave is building!

Brent Arends reports (accurately) at the Wall Street Journal that the claim that “timing doesn’t work” is a “myth” that The Stock-Selling Industry continues to promote for marketing reasons. He writes (in an article entitled “Ten Stock Market Myths That Just Won’t Die”): “This hoary old chestnut keeps the clients fully invested. Certainly it’s a fool’s errand to try to catch the market’s twists and turns. But that doesn’t mean you have to suspend judgment about overall valuations.” That says it.

August 2010

The Value Walk site has begun running a weekly column called Valuation-Informed Indexing in which I explain why Buy-and-Hold is a failed model and make the case for Valuation-Informed Indexing as the investing model of the future. Column entries, plus eight introductory articles describing the four unique investment calculators available at my site, are here.

September 2010

The Daily Caller site has posted ten of my articles relating to the political aspects of the struggle to begin a national debate on the Big Fail of Buy-and-Hold and its role in causing the economic struggle. The titles of the 10 articles are: (1) Can We Handle the Truth about Stock Investing?: (2) How We Invest Is a Political Question; (3) The Economic Crisis Is Trying to Tell Us Something (and We’re Not Listening); (4) Facts Don’t Matter; (5) Going Google Stupid; (6) How Much Transparency Can We Handle?; (7) Confessions of an Internet Troll; (8) Conservatives Fall Into a Trap by Blaming Obama for the Bad Economy; (9) Meet the New Media, Same as the Old Media; and (10) How Restoring Honor Will End the Economic Crisis. They are available here.

October 2010

I have begun writing a third weekly column on the Big Fail of the Buy-and-Hold Model and the role it played in causing the U.S. economic crisis. It appears Wednesday mornings at the Out of Your Rut site and is called Beyond Buy-and-Hold. The column entries can he found here.

Comments

Thanks for being specific about market timing

Thanks for pointing out the difference between long-term and short-term market timing. That is done way too little.

An argument that is often used against (long-term) market timing and in favor of buy-and-hold is that most investors won’t have the nerves to buy (when many have fear) and sell (when many have greed) at the right time. Objective market timing signals are a better solution for that, I may think, than to put your head in the sand with a blind buy-and-hold.

The term “market timing” seems to have got a negative sound to it. Investors, authors and analysts rather speak about buying when P/E’s are low and selling when they are historically high. Isn’t that just talking about an indicator for market timing without using the term itself?

Since you mentioned a post about “Rational Investing System” but didn’t see a link to it, I will Google it to read more about it. I think I will like it.

We are in complete agreement, Stock Trend Investing. There are good forms of market timing and bad forms of market timing, just as there are good and bad forms of lots of other things. The thing to do is to be clear about what forms of market timing work and what forms do not rather than to make “time” a dirty word. If you’re not timing the market, you’re not paying attention to price. And, if you’re not paying attention to price, you’re lost.

I now use the term “Valuation-Informed Indexing” to refer to what I used to refer to as “Rational Investing.” I’ve written many articles on how Valuation-Informed Indexing works. So you’ll find lots of stuff if you put that term in a Google search engine. Here’s an article that provides a survey of the work I have done in this field, with links to the most important materials:

http://arichlife.passionsaving.com/about/

Thanks much for stopping by and for taking time out of your day to help us all out.

Strawman Argument?

I’m not sure I agree with the general theme here, because I think you’ve constructed a bit of a strawman argument. Buy-and-hold is not, like you claim, based on ignoring valuations. It’s also not meant to be practiced mindlessly. It’s buy-and-hold, not buy-and-forget. The fundamental premise of buy-and-hold, at least the way I interpret it, is to purchase only stocks that you are comfortable holding in the long-term, and to refrain from short-term trading in an attempt to game the short-term fluctuations in the market.

An intelligent investor, however, practices systematic rebalancing. Even the simple act of rebalancing between cash and a single stock will enable an investor who practices buy-and-hold to benefit from the ups and downs of a market. When managing a larger portfolio, rebalancing will automatically allow the investor to ease out of over-valued stocks and accumulate their holdings of undervalued ones, thus beating the market.

It’s also possible to utilize your own special knowledge and intuition in order to guide both entry- and exit-points when you practice buy-and-hold. Buy-and-hold investors are in it for the long haul, and they typically sell stocks only in response to major events, such as paying for their children’s education, their own retirement, or major purchases like a car or down-payment on a house. These events can be anticipated, and you can use your knowledge to make a judgment call on timing — sell a bit early, or sell now?

I also think that this article is riddled with repeated assertions and opinions presented as fact. You say: “We know that buy and hold does not work.” Really? Who is “we”? I think that what you really mean to say is that “I believe that buy-and-hold does not work.”

While I think it’s good to offer a novel and critical perspective, I think that you would do well to either step up your level of rigor in this article, or to present it as an opinion piece and not a factual article. It’s too much opinion presented as fact, and, perhaps more importantly, you don’t accurately depict the investment philosophy that you’re trying to tear down. No one advocates a blind “buy-and-hold” philosophy without being tempered with common sense.

We’re obviously not in agreement on the substantive points. But you made your case well and I think you add some balance to a Knol that is otherwise all too one-sided (I think it would be fair to characterize me as the most severe critic of Buy-and-Hold alive on Planet Earth today).

I promise to go back and read your comment from time to time to see if over time some of the points made click with me enough to make me feel that I should make changes in the text of the Knol (rather than just having your comment here to let people know that there is another way of looking at things).

One statement that I can definitely sign onto today is a statement that more agree with your take than with mine. I don’t feel that I can quite characterize this as a mere difference of opinion as there is data and research involved and it is not just my opinion that the data shows that valuations affect long-term returns; that’s an objective fact (at least in my opinion!). But there is no question but that my take (whether opinion or fact) is today a minority take.

My take is that the difference here is that some still believe in University of Chicago Professor Eugene Fama’s research showing that the market is efficient (these are the Buy-and-Holders) and some believe that the research of Yale Economics Professor Robert Shiller showing that valuations affect long-term returns discredits the Efficient Market “finding” (we would say that it was never really a finding but merely an interpretation of the finding that short-term timing doesn’t work). I am not able to see how both things can be true. If the market is efficient, overvaluation is a logical impossibility. If overvaluation is real, the market is not efficient. Or at least so it seems to Rob Bennett.

In any event, you have helped us all out by being willing to take time out of your day to share your thinking re these matters with us. I wish you the best in all of your future endeavors!

After sleeping on this, I feel that I owe you a better response re your question about how I define “Buy-and-Hold,” Alex.

I define Buy-and-Hold as “a model for understanding how stock investing works that posits that it is not necessary for investors to engage in market timing to enjoy long-term investing success.”

The problem is the claim that timing is not required (many Buy-and-Holders go so far as to claim that “timing doesn’t work,” which is of course even worse). I try in the Knol to explain how the misunderstanding about timing came about. Research in the 1960s showed that short-term timing doesn’t work. That prompted University of Chicago Economics Professor Eugene Fama to put forward an <i>explanation</i> of this finding. Fama’s explanation was that the market is “efficient,” that is, always priced properly. Yale Economics Professor Robert Shiller showed in 1981 that valuations affect long-term returns and that the market is thus<i>not</i> efficient. If valuations affect long-term returns, stocks are more risky at times of high valuations than they are at times of moderate or low valuations and investors <i>must</i> engage in market timing (long-term timing, the form of timing that works, rather than short-term timing, which of course doesn’t) to have any realistic hope of long-term success. If you don’t time (change your allocation in response to big price swings), you are sooner or later going to be going with a stock allocation that is wildly inappropriate for someone with your risk tolerance. How could that ever work?

I love everything about the Buy-and-Hold Model other than its mistaken claim that timing is not required (or, even worse, the claim you often hear from Buy-and-Holders that timing is a bad idea!). I propose Valuation-Informed Indexing, which is Buy-and-Hold with the Get Rich Quick element (it is Get Rich Quick thinking that persuades many that going with a wildly inappropriate stock allocation might work out somehow) removed.

Is this all just my opinion? I say “no,” because it is the 140 years of historical stock-return data that shows that valuations affect long-term returns. The academic research of the past 30 years and the historical data going back as far as we have records <i>support</i> this particular opinion of mine while all that I know of that supports the idea that timing is not required is the unfortunate reality that the marketing departments of the big funds have found it profitable to persuade investors that stocks are a good thing to buy regardless of how insanely high they are priced.

All that said, there are many smart and good people who believe strongly that I am wrong about all this. Nothing could be more clear.

I thank you again for your helpful comment, Alex. Take care, my new friend.

No, that’s not a typo. I certainly do acknowledge that it’s a strange fact, however. It’s a strange fact that points to something important; that’s why I put it in. Please click on the link that appears where those words appear to view the documentation of this fact.

Most people think of the Efficient Market Theory as something new. Most people think of Buy-and-Hold as something new. I don’t think of either of these things as being new. They are really very, very old ideas dressed up in modern clothes. Since the first market opened for business, there has been a struggle between the idea of investing rationally (taking price into consideration when making allocation decisions) and investing emotionally (not taking price into consideration when making allocation decisions).

It is foolish not to take price into consideration. It never works. It’s not even possible for the rational human mind to imagine circumstances in which it ever could work. But yet we return to this “idea” again and again. There must be something that gives this idea great appeal. What is it?

The key to understanding this is appreciating that WE are the market. When we say that the market is efficient, we are saying that WE are efficient. When we say that the market is rational, we are saying that WE are rational. When we say that the market is perfect, we are saying that WE are perfect. Believing in Buy-and-Hold Investing is an exercise in flattery.

Have you ever met a person who was full of himself, who was so arrogant that he or she could not admit being wrong about anything? That’s what the investing public becomes as a collective entity when it becomes entranced with the Buy-and-Hold idea. One of the slogans that Buy-and-Holders love is “You can’t beat the market!” Again, WE are the market. What they are saying is — You can’t beat us — we are just so amazingly wonderful that nothing could ever be better!

What we need when we get caught up in the Buy-and-Hold “logic” is a dose of humility. That’s why God invented stock crashes. Once Buy-and-Hold becomes popular enough, there is only one way to bring it to can end — through a price crash that destroys so much wealth that it brings some humility to the arrogant proponents of the idea that this particular day’s investors have become so perfect that they can never be “beat.”

I am hoping that we can change this dynamic. The name of the book that I am working on is “Investing for Humans.” My argument is that humans are indeed drawn to excessive pride and thus investors are always going to feel temptations to yield to social pressures to go along with Buy-and-Hold “strategies.” But humans ALSO have learned to care for each other and to help each other practice humility. What if we focused more on these attributes rather than the attributes that cause us to promote Buy-and-Hold? We could develop the intelligence and compassion and fortitude to IGNORE the temptations to give in to desires to follow Get Rich Quick approaches.

I see this as being 70 percent of the investing project. The first job of anyone who chooses to become an investing expert is to develop the skills needed to convince others not to give in to the desire to believe in Buy-and-Hold approaches. The numbers stuff (which is indeed important) is secondary. There are smart people who say that people have been falling into the Buy-and-Hold trap ever since the first market opened for business and that this will always be the case. I don’t buy it. I think it’s a question of how hard you work it. I believe that the pain that comes with following Buy-and-Hold strategies has become so great now that the middle-class needs to finance its own retirements that we have no choice but to DO SOMETHING about this problem.

Anyway, the point of the reference to the mid-1500s was to show that the Buy-and-Hold problem has been around for a long, long time. This is something that has roots deep in human nature. We are all drawn to fantasies that we are perfect and cannot make mistakes. The entire point of Buy-and-Hold is to develop an indifference to evidence that we are making mistakes as investors (mistakes evidence themselves in overvaluation or undervaluation). The entire point of Rational Investing is to develop a desire to want to protect oneself from mistakes, which requires being aware of them, which requires being willing to look at the price of the stocks we buy before putting money down on the table.

Thanks again for helping out, TinLizzie. And thanks for your kind words as well.

[...] of Stock Picking May Be Coming to an End (CNBC) see also Why Buy and Hold Investing Can Never Work (A Rich Life) • Buy at the point of maximum pessimism Looking for Silver Linings (Alhambra Investment [...]

[...] Barry Rithlotz (owner of The Big Picture site) late yesterday afternoon linked to my article on Why Buy-and-Hold Investing Can Never Work at the Tuesday PM Reads section of his blog. The traffic brought in by that link made yesterday [...]

[...] The The Big Picture Blog recently posted a lengthy article (“Buy-and-Hold Is Dead — And Never Worked in the First Place”) telling the story of my ten years of work developing the Valuation-Informed Indexing concept with the help of the hundreds of my fellow community members who dared to “cross” the Buy-and-Holders by engaging in original research or discussing the implications of research already published (the VII concept is rooted in the 1981 finding of Yale University Economics Professor Robert Shiller that valuations affect long-term returns — Shiller has said in published interviews that he has never dared to tell us all that he knows about stock investing because he fears that he would be branded “unprofessional” if he were to do so). Site Owner Barry Ritholtz separately linked to an article of mine titled Why Buy-and-Holder Investing Can Never Work. [...]

There's good stuff going on at the Vanguard Diehards board lately. Petrocelli offers us a dose of The Common Sense That May Not Be Spoken when he says: "My conclusion after all these years is this: the focus on active/passive is a distraction. The focus should be on buying low-cost funds and diversifying. That's all. The active/passive distinction can make for some fine pissing contests, but it doesn't really accomplish a lot in the end."
That's good stuff.
I see Passive Investing as…

Set forth below is the text of a thread-starter that I recently put to the Goon Central board:
You say that valuations really do affect long-term returns but that this insight is not "actionable."
The suggestion is that staying at the same allocation is a neutral choice, one that does not require an "action."
You don't have to do anything to remain at the same allocation. In that literal sense, doing so is a non-action. But most Buy-and-Holders rebalance. That's an action. So…

Stock valuations matter. Stocks obviously offer a stronger value proposition at fair or low prices than they do at insanely high prices. But the Buy-and-Hold concept calls for investors to ignore valuations when setting their stock allocations. The purpose of a market is to set prices properly. If a large number of investors becomes determined to ignore value propositions, the market is not able to perform this function except by bringing on price crashes and the economic crises that follow…

Set forth below is the text of a comment that I recently posted to the Goon Central board:
Rob, you're confusing a casual observation with a physical constant.
No, I'm not, Yip. I am accepting that it is investor emotion that is the primary cause of stock price changes and then reporting on what follows from that. If the market is efficient (as Fama believes), Buy-and-Hold is the ideal strategy. If valuations (emotions) affect long-term returns, Buy-and-Hold is the purest and most…

Set forth below is the text of a comment that I recently posted to another blog entry at this site:
If stock markets level out and volatility falls, then to my mind the equity risk premium would dry up and stocks would be indistinguishable from bonds.
You are trying to make sense of things through the use of concepts developed by people who believed in the Buy-and-Hold Model, Laugh. This cannot be done.
Stock prices are determined by the productivity of the U.S. economy, not by market…

You often hear stocks described as a risky asset class. What people are getting at when they say that is that stock prices at some times go dramatically up and at other times go dramatically down. Most observations that stocks are risky are more properly viewed as observations that stock prices are volatile.
It's not the same thing.
The risk that you are worried about as a middle-class investor seeking financial freedom early in life is that investing in stocks will cause you to lose…

Set forth below is the text of a comment that I recently put to a discussion thread of this blog:
So B&H’ers are sloggers, not timers.
You insult the Buy-and-Holders with these words, Banned. You are acknowledging here that the Buy-and-Holders do not practice long-term timing.
LONG-TERM TIMING IS PRICE DISCIPLINE.
Investors who do not engage in long-term timing are not exercising price discipline. No market can function if a large number of participants are not exercising…

Set forth below is the text of a comment that I recently put to another blog entry at this site:
and stocks would be indistinguishable from bonds.
The returns on non-stock asset classes ARE generally determined by market forces (rather than by the productivity of the U.S. economy).
So there is a legitimate point to be made that, if the risk of stock investing was reduced by 70 percent and the long-term return on stocks remained stable, there would need to be some adjustment in the…